Sold MO and BAC puts so far today. MO is ex-dividend today but the stock price corrected at the open. Over-corrected IMO so I already got almost double the missed dividend credited to my account will have a nice long entry if MO pulls back much more this month. Basis would be sub $60.

Before we get into details, the companies where I sell options of any kind are companies I don't mind holding for the long term. However I usually have my long term position already and I use the options play as a separate strategy, with a separate amount of $ that I keep in option plays. The reason I use companies which I already own is simple: I keep an eye on them more than I do on others. And if I've qualified them to be long term holdings then there should be less risk of a catastrophic failure because I do like the company and their fundamentals.

So, back to the question.
You sell a put, basically hoping that it won't go that low. So the profit is the premium. What do you do if it does end up below the strike? Take a loss and buy the option back? Take the shares and sell a covered call more or less on the money?

I am sure you will get a few opinions on this subject and here is mine....

A true premium player will chase the better premiums that are easy to find on a screen. It is so tempting vs more conservative stocks. The underlying security is not so important to the true premium player. It works great right up until it blows up in your face when the market swings at the wrong time. It's just gambling because the put sale is basically naked. If you don't want to be assigned you can attempt to repurchase the put and roll it forward to a future date. You can use other strategies such as spreads to limit your risk. I am not interested in the time and stress required to make that work.

My personal rules are NEVER sell a put unless I truly desire to own the stock, and probably for the longterm. If the company story changes over the next month I might roll it forward, but that is never the plan going in. I have made about 8 put sale trades the past 10 days as I try to establish a DG portfolio at a discount. Mostly it is going very well. Here is an example of a trade I placed that isn't going so perfectly....

I desired to own MMM and the current price is 212.50. I'm a little nervous to enter since SEP-OCT can be tough, especially after the markets recent run. Trade wars likely etc. 100 shares is a 21K+ purchase and that's a big move for me. So I sell an OCT 19th put at the 210 strike price. $410 premium and I am pretty comfortable. If assigned my basis will be about $206. $6.50 below the price I was considering paying to go long now. Put sale looked good until yesterday when MMM announced some financing plan the market apparently didn't like. Stock dropped to about $208 with almost a month to go on the option contract. I am still OK but if the price drops much lower I will have to assess whether I want to be assigned or roll it forward. If the price stays anywhere near the strike rolling forward is no big deal. If I had went long at 212.50 I'd already be down $450. I wouldn't stress it if it was a $50 stock but we are talking big money with a $200+ stock. If a stock drops 5-10% you may maneuver out of it by rolling forward and profiting from time value erosion. If the stock goes into freefall you are going to eat it at some point. I'll let you know how this MMM play ends. Most of the other puts I sold are going to expire worthless and I sell another put because I do desire to go long on these stocks. I may have to sell some of these puts three times to go long. Barring a crash a few stocks will run away and I will not own them anytime soon. There are plenty of opportunities so I won't chase anything very far if it runs. I am getting windy again

Well I have sold about 15 or 16 put contracts since I started this thread. You would think I would be assigned some long positions by now but so far just collecting premiums, and few positions are n any danger of being assigned after the markets run the past few sessions. Overall I would no doubt be a little better off if I had just went long on all these positions because several have run. Better off this week anyway. If my only intent was to collect put premiums I am tearing it up. I think I will stay the course and someday the market will swing and make me a DGI investor. In the meantime the put premiums are nice. I'll be able to buy 100 shares of a stock just with put premiums soon

Lost track of which ones I already mentioned but here are a few recent puts for stocks I am not likely to own this month. Most will expire with no assignment.

CSCO-SKT-AAPL-MET-KHC-UPS-MO-T-BAC-SO-JNJ that's most of them I think.

I have multiple puts for SO at various strikes. They have potential news coming Monday so we'll see. I chickened out on MMM. Stock got pretty volatile and I got cold feet on a 100 share purchase. Took a $150 put profit after a few days and closed the position very early. I am scared of the high dollar industrials right now. China can easily mess up some individual US companies quarter if they even briefly cut off exporting the right commodity or component. The trade war is jsut getting started I'm afraid.

Still intend to add a restaurant and a quality REIT soon but waiting for the right valuation.

I should update this thread since I started it. After three months of executing this covered put strategy aggressively, I have seen sideways market, gentle rise and the OCT correction. Even during correction it works pretty well, though I can see how risky it could be if done on margin, which I am not. By following about 5 simple rules I estimate the results that follow. When I disregarded a rule or two the chance of success is cut in half. I would bother to dig the details o my account statements and post more specific info with real numbers if anyone is truly interested enough to read and offer feedback.

Here's the snapshot. Basically two months of options and the last month was a nasty market drop.

-35 total contracts sold, usually one contract, never more than two.
-10 have already expired worthless
- another 10 are likely to expired soon with stocks recovering some.
-I was "forced" to buy ATT-BAC and Abbott, about 5 contracts total, I didn't always like the price but I was willing to buy them anyway before they dropped.
-I made a very quick profit on about 5 put sales on stocks that ran high fast. (MCD-APPL-MMM etc) Those were higher priced put sales. I saw no need to be greedy and wait for them to expire weeks latere Cashed out and move on rather than be greedy. I definitely closed out positions that would have expired worthless anyway with more patience. But the market was volatile.
-Now the bad news. My timing on CVX, XOM, MRO and DPDW was horrible. I took a loss on CVX, MRO and Dupont. I rolled XOM forward to buy some time. UPS will be rolled next. Dupont was a total train wreck on a stock I don't even care to own longterm. I chickened out before earnings and lost more than I should have. I broke my rules on all of these positions.

Yes I did make considerable money and I also cut profits in half breaking my simple rules on just a few stocks. I won;t forget the lesson.

Interestingly enough some of the non-volatile stocks have worked best. I have been trying to buy utilities for two months. Hasn't happened even once yet. Collecting premiums that far exceed dividends so it's a win I guess. Same with pharma stocks. 80% on contracts expire worthless if I sell them on dips. Eventually I'll be forced into gong long which is where I desire to be.

Thanks, this is really interesting and useful to me! I'm really intrigued by he idea of comparing the premiums you collect to the dividends you would have collected.

Some questions:

When you say "expired worthless," you mean that the option was not exercised, you pocketed the premium, and were free to move on and use the cash that had been securing the put for your next endeavor, right?

What exactly do you mean when you say that you took a loss on CVX (for example)? Do you mean that the share price was lower than the strike price at expiration and so your "loss" was the difference between the strike price and the market price that you were required to pay (after accounting for the premium that you collected for selling the put)? Do you really consider this a loss, since you acknowledge (I think?!) that you would have been happy buying at the strike price at the time you sold the put?

If you don't mind me asking, are you making these trades in a taxable or tax-deferred account?

If in a taxable account, I assume the premiums collected are taxable income. Do you have to track those for reporting on your return, or does the brokerage send a statement at year end of some kind?

When you say "expired worthless," you mean that the option was not exercised, you pocketed the premium, and were free to move on and use the cash that had been securing the put for your next endeavor, right?

What exactly do you mean when you say that you took a loss on CVX (for example)? Do you mean that the share price was lower than the strike price at expiration and so your "loss" was the difference between the strike price and the market price that you were required to pay (after accounting for the premium that you collected for selling the put)? Do you really consider this a loss, since you acknowledge (I think?!) that you would have been happy buying at the strike price at the time you sold the put?

Thanks again!

Yes, when he says "expired worthless" then that means that the option ran it's course and expired while being out of the money. In this case, on the final day, the option's price hits $0 because exercising it would only lead to a loss thus making it absolutely worthless.

And that brings us to our second point.. well we all have our opinions but if the plan is to hold long term then I would certainly consider that a loss.
For example stock X is trading at $28 today. You have sold a put option with a strike of $30. You will be paying $3000 for something that is currently worth $2800. So I don't see any other way than saying "I lost $200 minus the premium".